Savings bonds

cheloneJanuary 1, 2005

These are not vehicles I presently own (save a $25 E bond I received for winning an essay contest in 1974!). The bond I mentioned is worth over $100 now and it's gotten me thinking about maybe buying more bonds when I have some "extra" cash. Do any of you buy them regularly? why or why not? And what series do you prefer?

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I buy them pretty often. The rate of return is good, and even better when you factor in that it's tax-deferred.

According to the U.S. Savings Bonds website, this is the difference between the I and EE Bonds:

The biggest difference is the rate you receive on your bonds. Rates for EE Bonds are calculated as 90% of 6-month averages of 5-year Treasury Securities market yields, while rates for I Bonds are calculated by combining fixed rates of return and semi-annual inflation rates based on the CPI-U.

The I Bonds seem to pay a little more most of the time.

Both the EE and I series Bonds must be held at least 12 months before cashing them in, and if you hold them less than 5 years, you will lose the last 3 months of interest when you cash them in.

This last point is one of the main reasons I like the U.S. Savings Bonds. There are some built in disincentives to cashing them in and spending the money. They're great to help you to save for some specific thing such as a new car, home, or education. (There are, in fact, tax incentives if you use the Bonds to pay for education.)

The other big plus of U.S. Savings Bonds is that they make very competitive rates of returns available to the very small investor. Where else can you get 3.67 percent today (the current I Bond rate) on a $25 investment?

Finally, I bet a lot of people who put their money in mutual funds in the 1990s wish they would have put it into U.S. Savings Bonds instead.

Here is a link that might be useful: U.S. Savings Bonds Official Site

    Bookmark   January 1, 2005 at 11:17PM
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Thank you very much for taking the time to answer my question, cowboyind. I am going to use my now mature E bond to buy some I bonds. And I think I will begin a modest "investment program" in bonds as a New Year's Resolution. As you've pointed out, the rate of return is better than most other options that offer the same level of security, and I may purchase bonds in dollar amounts that are easily amassed (and won't be "missed")!

    Bookmark   January 3, 2005 at 7:24AM
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Sure, and I'm glad it was helpful.

Actually I'm really glad you asked that, too, because I have $100 that I was given as a Christmas present that I was still thinking of what to do with. I'll take it and buy a Bond tomorrow.

    Bookmark   January 3, 2005 at 9:55PM
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Anywhere I can but a paper bond? Everythng seems to be elecronic now.


    Bookmark   January 18, 2005 at 8:00AM
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You held your $25. bond for thirty years and it doubled twice. That is, it took about 15 years on average to double.

Dividing the number of years to double into 72 gives you just under 5, which means that your effective rate of interest was about 5%, average.

If you lend your money to me (or any entity) accepting the guarantee that you'll get back every dollar that you invested at the end of the agreed term, there's another guarantee that no one tells you about: you won't get one dollar more, either (apart from the rent on the money).

Which means that you are the one that gets hurt by inflation.

If I borrow, and pay back each dollar that I borrowed, I benefit from inflation.

By the way - I pay cash for consumer goods, e.g. food, electricity or vacation, but I may borrow to buy stuff that lasts for a long time, capital goods, e.g. house, table or car, with the house being best, for it may well increase in value. The table may be if-fy ... and the car? Forget it! Rarely increase there!

Enjoy your year.

joyful guy

    Bookmark   January 18, 2005 at 1:21PM
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Actually, Joyfulguy, the Series I Bonds are indexed so that they always give a return in excess of the inflation rate. When you add in the tax considerations (taxes on the Bonds are deferred, so they grow tax-free), they are really a pretty decent investment.

Granted, there are other types of investments that have the potential of paying more in interest, capital appreciation, and dividends than guaranteed, insured investments. Individuals should consider their age, number of years before they'll need the money, and tolerance for risk as they decide what percentage of their money to allocate to more conservative investments such as U.S. Savings Bonds, as well as what percentage to put into more aggressive investments that present both higher potential rewards and higher risks.

Even some fairly "advanced" investors are saying that U.S. Savings Bonds are a good investment right now. And for people who do not have time or inclination to follow the markets and financial trends, they're ideal.

    Bookmark   January 19, 2005 at 4:34AM
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That's what I like about them, too, cowboyind. I get a weekly stipend (per diem) from my employer. Rather than simply "blow it", or put it in my regular savings acc't, or add it to longer term investments in unsecured vehicles, I've opted to buy bonds.

I'm actually quite pleased with my resolve. It is not money I need in the short term, and it's money that could very easily trickle away on small "thises and thats" without a "plan" for it. Last weekend I rolled the accumulated pocket change and netted very close to $100 ... now in a bond. :)

People don't plan to fail, they simply fail to plan... .

    Bookmark   January 19, 2005 at 5:33AM
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Yes, that's so true. The Savings Bonds give you a place where you can put small sums of money into an investment that gives a very worthy return. I know of nowhere else that you can invest such small sums and yet do this well. And, at least for me, once I buy the Bond and have it in my hands, there is a strong desire not to cash it in unless it's for a very good reason. So the $25, $50, or $100 that I probably would have just wasted becomes part of a savings plan.

    Bookmark   January 20, 2005 at 1:18AM
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Be careful holding them too long as well. At some point the return begins to diminish, especially considering an average 2-3% annual inflation rate.

    Bookmark   January 21, 2005 at 4:41PM
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The Series I Bonds earn interest for 30 years, so you wouldn't want to hold them any longer than that. But other than that, you're guaranteed a rate of return which is adjusted semi-annually based on the Consumer Price Index to reflect changes in the rate of inflation. So, in fact, Bonds are a good way to ensure that inflation does not erode your investment.

    Bookmark   January 21, 2005 at 11:37PM
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2 accountant friends of mine have ach tol dme that savings bonds were a poor investment tool & that overall the stock market (in the long terms earns abotu 8% interest), plus unlike the 80s a bond bought this year will take 20 years to come to maturity (it accrues interest for 30). I was recently consdiering buying more of these with daughter's $ until I was talked out of it.


    Bookmark   March 17, 2005 at 2:28PM
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Dont know about you but I am fairly young and on average I have not earned 8% on my mutual fund investments. I am a big proponent of diversity and Savings bonds are only one part of that mix, however they are a regular investment for me $150 per month. I also put 12% of my income in a 401k, 5% in mutual funds, and 2-10% in regular savings(depending on what I am saving for).

On another note check with your employer, both my wife and I purchase our savings bonds directly through our employer's. The cost of the bonds come right out of each paycheck and they mail them to the house.

    Bookmark   March 17, 2005 at 5:15PM
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Savings bonds are only part of my mix, too. But it's nice knowing I'm investing in something requiring 36 mos. for "maturity" that pays pretty well.

I have not seen returns from the market that have recouped what was "lost" following 9/11... . It makes me nervous, but I put my faith in the LONG TERM (historical, GULP!) returns. I have time on my side, I hope.

And believe me, if interest rates on "liquid" savings were better than they are I WOULDN'T be in the market, at least for shorter term goals.

    Bookmark   March 17, 2005 at 9:49PM
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Yes, investment advice is very easy to come by, here or anywhere else, and I know that many experts advise against Savings Bonds. Many other experts favor them.

I started putting more money into them when the mutual funds I had invested in continually LOST money.

The point of reaching "maturity" only applies to Series EE Bonds, and even with those it's not all that relevant, since all that really matters is the rate of interest being paid. I personally prefer the Series I Bonds because the interest rate paid on them is indexed to inflation and generally runs a little higher than what they pay in the Series EE. You buy the Series I for full face value and there is no point of maturity - the interest just accrues and the Bond increases in value.

    Bookmark   March 18, 2005 at 12:18AM
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Just so you know, you are right, and the market has HISTORICALY returned over 8%. You simply need to invest for the long haul. Unless you have an EXTREMELY low risk tolerance and you are over 62 1/2, forget the bonds.

    Bookmark   September 18, 2005 at 3:07AM
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The managers of the mutual funds eat up a substantial portion of the actual growth, as well.

Learn how money works - that's a good hobby. That pays well.

joyful guy

    Bookmark   September 20, 2005 at 5:49PM
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Yes, I and E bonds are NOT as good 'winners' as the stock market; the problem is, most people do not invest in the 'stock market', but in individual stocks, which might or might not beat the yearly average. If you held WorldComm when many did and for your $20 investment got paid $120; you did well, if you held onto it too long, it became worthless. Same with Enron, same with airline stocks before and after 911, same with GM (oh, sorry, it hasn't tanked yet).

The point of bonds is that they should or might be part of the 'mix' of investments that you have in order to achieve your long-term financial goals; things such as a very-safe but low-paying things such as bonds, maybe mutual funds, and then my favorite money-makers; real estate. I get a mimimum of 150% return on RE on the kind I do (red tag, or condemned homes). But it's very, very risky. I've been buying bonds since I started my job; 18 years. I've never missed that money, because I never had it. It's all part of the diversification of my portfolio.

My stocks have gone up and down, some have paid off (WorldComm), others haven't. RE has gone up and down. My mutual funds have gone up and down. But that measly $100 a month I've put into my E bonds is paying for my kid's college education. It's all done, all paid for, and it was totally painless.

I wouldn't bet the farm on them, but I also wouldn't bet the farm on some of the ex-crack houses I've bought; it's about the proper MIX of investments to achieve your goals.

    Bookmark   November 22, 2005 at 8:34PM
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I can tell a very similar story from my own family. My great-uncle who passed away a few years ago never made a whole lot of money; I think he said when he retired in 1975 he was making about $800 a month. But with the payroll deductions for U.S. Savings Bonds, he had paid off his house, he never once in his life paid anything but cash for a car, and I don't think he ever even bought anything on credit. I'm not suggesting that other people should live this way (I certainly don't), but it just shows the tremendous power that regular savings can give a person. He always said he never even missed the money they took out of his check to buy the Savings Bonds, but whenever he needed money to buy anything, he had it.

So many of us are always on the other side of the fence, paying interest, rather than having it paid to us. Savings Bonds can be a great way for a normal person of modest means to put himself or herself on the receiving end of interest rather than the paying end. Yes, there are other investments, but people who do not make a lot of money cannot really afford to lose what they do have.

    Bookmark   November 24, 2005 at 8:50AM
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